04 March 2022

Why does the ‘poverty premium’ mean some people end up paying more for services?

04 March 2022

Many of us are paying more for everyday bills, as households are gripped by a rise in living costs.

But some pay an additional ‘poverty premium’ on top of this, for services many of us may take for granted.

What is the poverty premium and who does it affect?

The poverty premium means some people may end up being charged more for services, or find them hard to access at all.

There are other ramifications, too: those affected may have fewer borrowing options and end up paying more for a loan if they have struggled with credit in the past, or they may find it hard to access banking services. Comparing costs may also be difficult if the internet isn’t easily accessible.

Insurance premiums might be more if you live in an area with a high crime rate (Alamy/PA)

Someone may also end up paying more for their insurance if they live in an area with a high crime rate, or perhaps they find it harder to easily access cash in their community.

Research from Which? (which.co.uk) indicates some of the most deprived areas, where people are more likely to depend on cash, have seen a significant shift away from free-to-use ATMs in the past.

Richard Lane, director of external affairs at StepChange Debt Charity (stepchange.org), explains: “The poverty premium overlaps massively with problem debt. People experiencing debt are more likely to have to pay more for goods and services, such as being put onto prepayment meters for energy, and only being able to access high-cost credit, rather than affordable ways of borrowing for essential items.”

How can people reduce the poverty premium?

There are some potential ways to reduce the premium. Being on the electoral roll could help some people to improve their credit score, and some credit reference agencies also take account of rental payments, for example.

There are little things you can do that can all add up and help you improve your financial situation

Lane says: “There are little things you can do that can all add up and help you improve your financial situation. Having a proper budget, realistically taking account of all your income and essential expenditure, should be your starting point.

“Then see if there are any costs you can cut: you might not be able to cut your energy bills right now, but can you get a cheaper broadband deal, or do you qualify for any social tariffs?

“Ask your providers how they can help you reduce your costs. See if you can swap any higher cost options for lower ones: can you club together with friends to bulk buy cheaper store cupboard goods? Can you claim any benefits or get support from your local council?”

For those really struggling, he says: “Don’t be tempted to try to borrow your way out of difficulty by taking on more loans. If you’re already falling behind, this will only make your costs even higher and your debt even more unaffordable. Instead, check out the organisations who can help you. If you’re facing debt, StepChange, Citizens Advice (citizensadvice.org.uk), National Debtline (nationaldebtline.org) and other charities can all help you find a solution.”

Taking stock of your financial situation will help (Alamy/PA)

What is being done to reduce the premium?

Industry representatives say they’ve been working to tackle the issue. Peter Tyler from trade association UK Finance (ukfinance.org.uk), which represents the banking and finance industry, says: “Financial inclusion and access to banking services are a key priority for UK Finance and its members.

“The sector has significantly reduced the number of adults believed to be ‘unbanked’ and provides basic bank accounts to over seven million consumers who would otherwise struggle to access core banking services.

“Tailored support is also provided to a range of groups, such as prisoners, the homeless and refugees, to help them access the banking system, with the Prisoner Banking Programme opening over 4,000 basic bank accounts during the first nine months of 2021.

“Ensuring there is access to cash is another important issue and the banking and finance industry has publicly committed to maintaining access to cash for those that need it. In December 2021, the Access to Cash Action Group set out a range of solutions, including shared bank hubs and free ATMs, alongside cashback without purchase in shops.”

The UK Government has also said it will legislate to protect the future of cash. Meanwhile, the Association of British Insurers (ABI) says firms are committed to offering competitively priced, value for money insurance, to as many people as possible.

An ABI spokesperson adds: “The cost of cover reflects the risk. However, insurers recognise that those on lower incomes, many of whom may be most in need of insurance, will need extra help, which is why some products – such as contents insurance policies for renters on low incomes – can be tailored to their needs.

People should shop around, and may wish to consider using an insurance broker, to get the right policy for their particular needs at the best price

“We’re committed to working with the regulators and other organisations as a continuing priority, to address the different needs of customers and those in vulnerable circumstances. Insurance remains a competitive and innovative market and people should shop around, and may wish to consider using an insurance broker, to get the right policy for their particular needs at the best price.”

Nisha Arora, director of consumer and retail policy at the Financial Conduct Authority, says: “Customers can find themselves in vulnerable circumstances at any time – including those who are struggling financially. That’s why we published our guidance on the fair treatment of vulnerable consumers.

“We have intervened on behalf of consumers repeatedly – through our work during the coronavirus pandemic, with reforms to overdrafts and other high-cost credit, and in tackling the loyalty penalty for home and motor insurance. We are also taking steps to ensure continued access to cash.”

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